How Binding is Low Social Capital for Economic Growth? - Further Lessons from the Italian Regional Divide

Abstract

Does a persistently low endowment of social capital inevitably imply slow growth and lagging behind? We address this question by considering regional growth in the presence of highly heterogeneous social capital stocks. We maintain that the influence of social capital on growth depends crucially on the institutional set up. In particular, we claim that when the within-country distribution of social capital is highly heterogeneous and policy making is centralized, the local endowments of social capital - which display their effect mainly on the functioning of local institutions - plays a weaker role than when policy is decentralized. Our claim is based on a detailed analysis of the Italian regional divide. Italy, the case study par excellence on social capital, is an ideal case because social capital and per capita income are highly and persistently heterogeneous across regions, and because a deep process of decentralization was adopted in the 1970s, after decades of centralized policy making. Our hypothesis is formally defined by means of an endogenous growth model in which social capital affects the accumulation of public capital, and its influence depends crucially on how (de)centralized is policy making. The model is then calibrated on the long run Italian data considering two macro regions: Center-North and South. We show that low social capital exerted an increased negative influence on growth for the South as a consequence of decentralization, causing a sudden halt of a twenty-year strong process of regional convergence.

Keywords: social capital, convergence, economic growth, economic development

JEL Classification: O4, N9, R5